has served 2 full terms of 3 years each, except that the class C director who is designated by the Board as Chairman and Federal Reserve agent may serve for a total of not to exceed 3 full terms. The proposed amendment would limit the terms of service of all directors, class A and class B, as well as class C directors, but would continue to permit an exception as to the Chairman. 53. FEDERAL RESERVE AGENTS AND ASSISTANT FEDERAL RESERVE AGENTS Existing law Paragraphs 20 and 21 of section 4 of the Federal Reserve Act (12 U. S. C. 305 and 306) read as follows: "Class C directors shall be appointed by the Board of Governors of the Federal Reserve System. They shall have been for at least two years residents of the district for which they are appointed, one of whom shall be designated by said board as chairman of the board of directors of the Federal Reserve bank and as 'Federal Reserve agent.' He shall be a person of tested banking experience, and in addition to his duties as chairman of the board of directors of the Federal Reserve bank he shall be required to maintain, under regulations to be established by the Board of Governors of the Federal Reserve System, a local office of said board on the premises of the Federal Reserve bank. He shall make regular reports to the Board of Governors of the Federal Reserve System as deputy chairman to exerrepresentative for the performance of the functions conferred upon it by this Act. He shall receive an annual compensation to be fixed by the Board of Governors of the Federal Reserve System and paid monthly by the Federal Reserve bank to which he is designated. One of the directors of class C shall be appointed by the Board of Governors of the Federal Reserve System as deputy chairman to exercise the powers of the chairman of the board when necessary. In case of the absence of the chairman and deputy chairman, the third class C director shall preside at meetings of the board. "Subject to the approval of the Board of Governors of the Federal Reserve System, the Federal Reserve agent shall appoint one or more assistants. Such assistants, who shall be persons of tested banking experience, shall assist the Federal Reserve agent in the performance of his duties and shall also have power to act in his name and stead during his absence or disability. The Board of Governors of the Federal Reserve System shall require such bonds of the assistant Federal Reserve agents as it may deem necessary for the protection of the United States. Assistants to the Federal Reserve agent shall receive an annual compensation, to be fixed and paid in the same manner as that of the Federal Reserve agent." Recommendation An amendment providing for the delegation by a Federal Reserve agent to an assistant Federal Reserve agent of the agent's administrative functions; eliminating the requirement that the Federal Reserve agent and assistant Federal Reserve agent have "tested banking experience"; and providing that an assistant Federal Reserve agent may serve during a vacancy in the office of Federal Reserve agent as well as during his absence or disability. Reasons Under the provisions of existing law, the Federal Reserve Board is required to appoint 3 of the 9 directors of each Federal Reserve bank and to designate one of the directors appointed by it as Chairman and Federal Reserve agent. The person so designated is required to have "tested banking experience" but is forbidden to be a director, officer, employee or stockholder of any bank. Under the law, the duties prescribed for the Chairman as such are to preside at meetings of the board of directors, to conduct elections of class A and class B directors, and to report to the board with his recommendations any undue use of bank credit by member banks. As Federal Reserve agent, he is required to maintain a local office of the Board on the premises of the Federal Reserve bank, to act as the official representative of the Board for the performance of the functions conferred upon it by the Federal Reserve Act and to perform any statutory duties of a technical and supervisory nature, such as attending to the issuance and retirement of Federal Reserve notes, holding and releasing collateral therefor and instituting proceedings for the removal of officers and directors of member banks for violations of law or continuation of unsound practices. The duties of the Federal Reserve agent are thus largely of a ministerial character. There is no sound reason why these duties should necessarily be personally performed by the Federal Reserve agent who, as Chairman of the Board of Directors, must devote his attention to matters of policy involved in the operations of the Federal Reserve bank. As a matter of practice, the agent delegates many of his ministerial functions to assistants. It would seem desirable, however, to clarify the fact that the Federal Reserve agent has authority to delegate to an assistant Federal Reserve agent any of his duties which are of a ministerial character and also to authorize an assistant agent to act in lieu of the agent not only during the absence or disability of the agent but also during a vacancy in his office. Moreover, under existing law, both the Federal Reserve agent and assistant Federal Reserve agents must be persons of "tested banking experience." However, their duties are not such as to require tested banking experience, and the requirement adds to the difficulty of finding qualified men to serve as chairmen of the boards of directors of Federal Reserve banks. Accordingly, it is believed that the provision for tested banking experience might be eliminated from the law, leaving to the discretion of the Board of Governors of the Federal Reserve System the determination of the question whether a person to be appointed is properly qualified for the position. Existing law 54. PAYMENT OF RESERVE BANK EARNINGS TO TREASURY The first paragraph of section 7 of the Federal Reserve Act (12 U. S. C. 289) reads: "SEC. 7. After all necessary expenses of a Federal reserve bank shall have been paid or provided for, the stockholders shall be entitled to receive an annual dividend of 6 per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met, the net earnings shall be paid into the surplus fund of the Federal reserve bank." The second sentence of the fourth paragraph of section 16 of the Federal Reserve Act (12 U. S. C. 414) reads: "*** The Board shall have the right, acting through the Federal Reserve Agent, to grant in whole or in part, or to reject entirely the application of any Federal Reserve bank for Federal Reserve notes; but to the extent that such application may be granted the Board of Governors of the Federal Reserve System shall, through its local Federal Reserve agent, supply Federal Reserve notes to the banks so applying, and such bank shall be charged with the amount of the notes issued to it and shall pay such rate of interest as may be established by the Board of Governors of the Federal Reserve System on only that amount of such notes which equals the total amount of its outstanding Federal Reserve notes less the amount of gold certificates held by the Federal Reserve agent as collateral security. ***” Recommendation An amendment to provide specific direction or authority for payment to the United States by the Federal Reserve banks of a percentage of their net earnings after expenses and dividends. This might be done through one of two methods: (1) An amendment specifically authorizing or directing the Board of Governors of the Federal Reserve System to require the Federal Reserve banks to transfer a portion of their net earnings annually to the United States, without regard to the volume of Federal Reserve notes outstanding, or (2) an amendment requiring the Federal Reserve banks to pay 90 percent of their net earnings after expenses and dividends to the United States as a franchise tax, after accumulation in the case of each bank of a surplus equal to subscribed capital. The Board of Governors expresses no opinion at this time as to which of these two methods is preferable. Reasons Prior to 1933 each Federal Reserve bank was required by the provisions of section 7 of the Federal Reserve Act to pay a franchise tax to the United States equal to 90 percent of its net earnings, after it had accumulated a surplus equal to its subscribed capital. Up until the end of 1932 Federal Reserve banks had paid franchise taxes to the United States Treasury amounting to $149 million and at that time the Federal Reserve banks had accumulated surplus accounts of $278 million as compared with subscribed capital aggregating $302 million. The Banking Act of 1933 providing for the establishment of the Federal Deposit Insurance Corporation required each Federal Reserve bank to pay an amount equal to one-half of its surplus on January 1, 1933, as a subscription to the capital stock of the Corporation. These subscriptions amounted to $139 million and reduced the surplus of the Federal Reserve banks to an equivalent figure, or considerably less than one-half of their subscribed capital. Congress, therefore, eliminated the franchise tax in order to permit the Federal Reserve banks to build up their surplus accounts from future earnings. Net earnings for the next 10 years were relatively small and at the end of 1944 the combined surplus accounts of the Federal Reserve banks were less than 75 percent of their subscribed capital. During the next few years, however, net earnings increased substantially, due primarily to large holdings of Government securities. This made possible transfers to surplus accounts, which increased the combined surplus of the Federal Reserve banks to approximately $440 million at the end of 1946 as compared with subscribed capital of nearly $374 million. In these circumstances, the Board concluded in 1947 that it would be appropriate for the Federal Reserve banks to pay to the Treasury the bulk of their net earnings after providing for necessary expenses and a statutory dividend on stock. For this purpose the Board invoked its authority under section 16 of the Federal Reserve Act, which provides that each Federal Reserve bank shall pay such rate of interest as may be established by the Board on the amount of its outstanding Federal Reserve notes less the amount of gold certificates held by the Federal Reserve agent as collateral security. The Board, accordingly, decided to establish such rates of interest as would make it possible to transmit to the Treasury approximately 90 percent of net earnings after dividends of each of the Federal Reserve banks for the year 1947, and this has been done annually since that time. By thus invoking its authority under section 16, the Board has been able to accomplish the same results as were accomplished by the payment of a franchise tax, i. e., the payment of excess earnings of the Federal Reserve banks to the Government. In each annual report since that time the Board has informed Congress as to the amounts paid by the Federal Reserve banks to the Treasury as interest on Federal Reserve notes. The aggregate amount paid by the Federal Reserve banks to the United States under this authority for the years 1947 to 1955, inclusive, is $2,049,000,000, the payment for the year 1955 being over $251 million. It will be recalled that the report of the Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report in 1952 included a statement that while the subcommittee approves of the action of the Board by which earnings have been paid to the Treasury since 1947, it believes that it would be better if provision for such return were made by legislative action. In view of the volume of earnings of the Federal Reserve banks in recent years and the present amount of their subscribed capital stock, $639,106,000, and the present amount of their combined surplus, $693,612,000, it is believed that a part of the earnings of the Reserve banks should annually be paid to the United States. This might be done in one of two ways: By action of the Board of Governors.-The provisions of the Federal Reserve Act are specific in authorizing the Board of Governors to establish a rate of interest to be paid by a Federal Reserve bank on its outstanding Federal Reserve notes not covered by gold, and the discretion of the Board in this regard is unrestricted by the terms of the statute. Accordingly, it is the Board's opinion that it is clearly authorized to require the Federal Reserve banks to take the action it did in 1947 and annually since that time. However, the authority to take this action has been questioned in some quarters and the procedure involved is somewhat complicated in the calculation of the amounts of the payments. To clarify this matter, the Board could be given a specific authority or direction to require the Federal Reserve banks to transfer annually to the United States such portion of their net earnings as the Board may deem appropriate in the circumstances, without the necessity for relating the requirement to outstanding Federal Reserve notes not covered by gold collateral. Such an amendment, if acceptable to Congress, would put at rest all questions in the matter and would simplify the mechanics of the operation. By restoration of the franchise tax.-The other method of accomplishing the desired result would be to restore to the law a provisions requiring each Federal Reserve bank, whenever its surplus equals or exceeds the amount of its subscribed capital stock, to pay annually to the United States as a franchise tax 90 percent of net earnings after provision for expenses and dividends and such reserves for contingencies as may be necessary. This would in effect restore the situation as it existed prior to 1933. 55. USE BY TREASURY OF FUNDS RECEIVED FROM FEDERAL RESERVE BANKS Existing Law The first sentence of the second paragraph of section 7 of the Federal Reserve Act (12 U. S. C. 290) reads: "The net earnings derived by the United States from Federal Reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States under regulations to be prescribed by the Secretary of the Treasury. * * *” Recommendation That this sentence be repealed. Reasons From the date of the original enactment of the Federal Reserve Act of 1913 until the passage of the Banking Act of 1933, the law provided that the Federal Reserve banks should pay a portion of their net earnings to the United States as a franchise tax. This provision for a franchise tax was included in section 7 of the Federal Reserve Act immediately prior to the sentence quoted above with reference to the use by the Secretary of the net earnings derived by the United States from Federal Reserve banks. In view of the fact that the payment of the franchise tax by the Federal Reserve banks to the United States has not been a part of the law since 1933, the first sentence of the second paragraph of section 7 is believed to be obsolete and might well be eliminated from the law. It is understood that for many years the total amount of outstanding United States notes has been approximately $347 million, against which there is a reserve held in the Treasury of about $156 million, moreover, the use by the Secretary of earnings derived by the United States from Federal Reserve banks to reduce the outstanding indebtedness of the United States would not necessarily have any net effect upon the amount of the outstanding debt, since under other authority the debt could be increased within the limit permitted by recent statutes. Thus, any practical effect which this provision in section 7 might have had on the use of funds by the Treasury appears to have been superseded by the general statute governing the administration of the public debt, and this is another reason, in addition to the repeal of the franchise tax, why the provision might well be deleted as obsolete. Existing law 56. TAXATION OF FEDERAL RESERVE BANK STOCK The third paragraph of section 7 of the Federal Reserve Act (12 U. S. C. 531) provides: "Federal reserve banks, including the capital stock and surplus therein, and the income derived therefrom shall be exempt from Federal, State, and local taxation, except upon real estate." Section 6 of the Public Debt Act of 1942 amended section 4 (a) of the Public Debt Act of 1941 to read as follows: "SEC. 4. (a) Interest upon obligations, and dividends, earnings, or other income from shares, certificates, stock, or other evidences of ownership, and gain from the sale or other disposition of such obligations and evidences of ownership issued on or after the effective date of the Public Debt Act of 1942 by the United States or any agency or instrumentality thereof shall not have any exemption, as such, ***" Recommendation An amendment to remove the exemption from taxation of dividends on Federal Reserve bank stock issued before the effective date of the Public Debt Act of 1942 so as to put such dividends on the same footing as dividends on stock issued after that date. Reasons The effect of the Public Debt Act of 1942 was to remove the exemption with respect to dividends on Federal Reserve bank stock issued after the effective date of that act, March 28, 1942, but to leave the exemption in effect with respect to dividends on such stock issued before that date. This results in a differentiation between banks admitted to membership after that date and those admitted previously. It also results in a differentiation between stock issued before, and stock issued after that date, to banks admitted before that date, for example, where a bank admitted to membership before that date increases its capitalization after that date and acquires additional Federal Reserve bank stock. The differentiation results from considerations having no relation to the System on membership therein, but rather to the considerations which led to the enactment of the above provisions of the Public Debt Act of 1941 and the Public Debt Act of 1942. The Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report (Patman) recommended in 1952 that the exemption be removed entirely, saying: "The subcommittee does not believe that the analogy between the contractual tax-exemption provisions of United States securities and the statutory tax exemption of dividends on stock of the Federal Reserve banks is well taken, and recommends that the appropriate legislative committees consider the subjection of all dividends on Federal Reserve bank stock to Federal income taxation, either by direct legislation or by provision for the recall and reissue of all outstanding stock of the Federal Reserve banks." 57. CAPITAL NOTES AND DEBENTURES ELIGIBLE FOR PURCHASE BY Existing law The first paragraph of section 9 of the Federal Reserve Act (12 U. S. C. 321), relating to applications by State banks for membership in the Federal Reserve System, provides in the third sentence thereof that: "***For the purposes of membership of any such bank the terms 'capital' and 'capital stock' shall include the amount of outstanding capital notes and debentures legally issued by the applying bank and purchased by the Reconstruction Finance Corporation. ***” Section 345 of the Banking Act of 1935 (12 U. S. C. 51b-1), provides that if any part of the capital of a national bank, State member bank, or bank applying for membership in the System consists of preferred stock, the determination of whether or not its capital is impaired shall be based on the par value of its stock even though the amount which holders of the preferred stock are entitled to receive in the event of liquidation shall be in excess of the par value of such preferred stock. The section then further provides: "*** If any such bank or trust company shall have outstanding any capital notes or debentures of the type which the Reconstruction Finance Corporation is authorized to purchase pursuant to the provisions of section 304 of the Emergency Banking and Bank Conservation Act, approved March 9, 1933, as amended, the capital of such bank may be deemed to be unimpaired if the sound value of its assets is not less than its total liabilities, including capital stock, but excluding such capital notes or debentures and any obligations of the bank expressly subordinated thereto. * * *" Recommendation An amendment to repeal the sentences contained in the first paragraph of section 9 of the Federal Reserve Act and in section 345 of the Banking Act of 1935, as quoted above, which relate to capital notes and debentures of the kind authorized to be purchased by the Reconstruction Finance Corporation. Reasons The Reconstruction Finance Corporation is in liquidation and very few, if any, of the capital notes or debentures purchased by the Corporation are now outstanding. The reasons for which the purchase of such notes and debentures was authorized in the 1930's and for which they were allowed to be considered as part of a bank's capital have ceased to exist, and consequently the provisions of the statutes quoted above no longer have any real significance. Existing law 58. REPORTS FROM MEMBER BANKS The second sentence of the sixth paragraph of section 9 of the Federal Reserve Act (12 U. S. C. 324) provides that State banks admitted to Federal Reserve membership |